The challenge of achieving the Sustainable Development Goals (SDGs) by 2030 is becoming more difficult—and more costly. Asia and the Pacific, like other regions, is lagging on SDG progress. UNESCAP now says that at this rate the SDGs won’t be achieved until 2065.
To halt this trend, trillions of dollars in extra development finance is needed particularly from the private sector’s vast resources. ADB pioneers the mobilization of commercial capital from both public and private sources using a variety of products. Due to the widening SDG financing gap, it has become critical for institutions like ADB to catalyze and channel the deep resources of private capital, especially from institutional investors, through the innovative use of syndication, credit enhancement, risks transfers, guarantees, and blended finance.
In 2022, ADB catalyzed $7.1 billion in private sector financing. Its unique ability to attract private funds was showcased in early 2023 with the signing of a $692.55 million financing for a wind power plant in Lao People’s Democratic Republic (Lao PDR). Known as the Monsoon Wind Power Project, the plant will be the largest wind power plant in Southeast Asia. ADB arranged, structured, and syndicated the entire financing package—the largest ever syndicated renewable project financing transaction among ASEAN countries.
Tarang Khimasia, a member of the ADB private sector team that closed the deal, explains the critical role played by private capital in Monsoon, and increasingly across ADB’s operations.
Why and how does ADB mobilize capital?
Capital mobilization and cofinancing activities are at the core of ADB's mission. Development banks use the term “mobilization” when talking about attracting additional capital to supplement investments that we make from our own balance sheets. Cofinancing is a key pillar of ADB's Strategy 2030, which targets a substantial increase in long term cofinancing by 2030 with every $1 in financing for its private sector operations matched by $2.50 of long-term cofinancing.
Mobilizing financing from commercial sources allows ADB to increase the leverage of our own financing to help carry out our mission and deliver our operational priorities in the private sector. ADB uses various products including but not limited to direct syndications, blended finance, credit insurance and the use of unfunded and funded platforms, and programs to mobilize commercial capital from both private and public (official) sources.
The Monsoon wind power project in Lao PDR is ADB’s biggest syndication and one of the biggest among ASEAN members to date. How did this project happen?
The Monsoon wind power project is a unique landmark project in many respects. This 600-megawatt (MW) cross border wind project is the largest wind or solar project in ASEAN on record, and the largest wind/solar project financing in the ASEAN region to date. The project’s scale resulted in a significant $700 million debt requirement. A well-planned strategy was needed to raise this debt.
The ADB private sector deal team first engaged with the lead developer on this project back in 2015. It was a huge team effort that culminated in the financial close of this project led by ADB as sole mandated lead arranger and book runner. ADB's credibility in the project finance market and its long-term relationship with the client as well as with respective governments and agencies was a key factor in ADB being mandated to structure and arrange the entire financing package.
Significant time and intellectual capital was devoted to structuring what we expected would be a bankable transaction in light of the significant complexity and contractual risk mitigation that needed to be built into the structure. Cutting edge first-time use of blended finance technology mitigated key project bankability risks, which included curtailment. Once we agreed on the structure with the lead sponsor, the focus shifted to tailor a syndication strategy to deliver multiple pools of liquidity and maximize the chances of a successful syndication.
How did the syndication strategy capture different pools of liquidity?
The ADB team worked diligently with the lead sponsor over the summer of 2021 to prepare a comprehensive syndication pack that included a detailed information memorandum and preliminary syndication term sheet. Syndication was formally launched into the market in October 2021 to almost 30 lenders that included a mix of private sector domestic, international and regional commercial banks, other multilateral development banks (MDBs), development finance institutions (DFIs), and official agencies. This wide canvassing of the market was deliberate, as we knew there was a long road ahead and it was highly likely that lenders would fall away due to the challenging nature of the project.
What followed was a multistage syndication process that required potential lenders to submit Letters of Interest at different stages confirming key interest on the basis of certain commercial and other terms. The initial response was overwhelmingly positive with the market indicating around $1.7 billion of interest against a debt requirement of around $700 million.
Around 6 months from the launch of syndication, ADB together with the lead sponsors settled on the final shortlisted lender group after a comprehensive syndication and selection process. Initial kick off meetings with the shortlisted lender group of 14 were held in May 2022 when the due diligence process was formally launched.
Further refinement of the lender group took place during the due diligence and credit approval phase leading to the final lender group of eight institutions. The final lender group comprises an ideal mix of domestic and international private sector commercial banks, MDB's, DFI's and official agencies. This demonstrates a fantastic partnership between private and public sector lenders, with both sets of lenders taking comfort from the others’ presence for different reasons. The final structure incorporated two tranches of senior debt at different tenors; a 17-year ADB B loan tranche with participation from private sector commercial banks, and a 19-year tranche of parallel loans from the public sector lenders (with one domestic commercial bank also joining the 19-year tranche).
Funds were also raised from the Canadian Climate Fund for the Private Sector in Asia (CFPS, CFPS II) and the Leading Asia’s Private Infrastructure Fund LEAP (Japan). What role did this financing play in delivering the project?
Concessional financing addressed the technical curtailment risk, which was a key bankability issue and concern for lenders. Under the project’s power purchase agreement, the output of the project can be curtailed, or restricted for various technical reasons. ADB initially sought to address curtailment risk through conservative debt sizing and standard debt service reserve accounts.
However, additional support was needed. Thus ADB’s concessional financing package of $60 million consisted of loans of up to $20 million from LEAP and up to $30 million from the CFPS and CFPS II in addition to a $10 million grant from ADB’s ADF-13 Private Sector Window.
ADB used a portion of the concessional finance to fund project costs with a lower interest rate and back-ended repayment. This gave the project a higher debt service coverage ratio, especially for the commercial bank B Loan tenor period. Secondly, ADB used a portion of the concessional finance to fund an additional reserve account to address the potential for curtailment. This account will provide funds to cover a portion of debt service in periods where curtailment or extreme curtailment results in insufficient cash for the borrower to repay senior lenders. This innovative and targeted structure was agreed with the client ahead of launching the syndication in order to bring a bankable project structure to market.
What were the main challenges to mobilizing capital for Monsoon, and what lessons did ADB learn in overcoming them?
Firstly, it is very important to acknowledge that the project finance market in Asia is not a "syndicated" market. This means that not all project finance transactions in the region go through the process I have outlined. Asia’s project finance market is overwhelmingly one that can be termed as a "sponsor-led club" market.
This means that sponsors select a lender group at the outset and "club" the lender group together so they all have a collective "seat at the table" and no one institution is responsible for leading the transaction. Different roles (such as technical, legal, insurance, modelling) are allocated to different lenders by the sponsors at the outset. The lenders collectively structure, negotiate and agree on the terms of the financing.
Monsoon is a rare example of a truly syndicated project financing in Asia. In fact, ADB led the only two other such recent examples - the Lotus Wind transaction in Viet Nam which closed in 2020 and the BIM Wind Power transaction signed in December 2022. The syndicated nature of this transaction brings about its own challenges as ADB had to structure a package that was bankable. This creates tremendous pressure as the wrong structuring decisions could result in a failed syndication. Additionally, ADB was responsible for leading all the due diligence work streams that would typically be shared, and for hand-holding the lenders through their respective and very individual credit approval processes.
All this took place in the context of a highly technical transaction which included the following challenges:
- The cross-border nature of the financing, and the size of the project and corresponding financing requirement.
- A request to lenders (due to the competitive tariff) to stretch tenors beyond what had previously been achieved for similar transactions (ADB and other public sector lenders have previously managed 17 years while the limit for private sector lenders up until now was 15 years)
- Bankability risks that prompted first-time use by ADB of blended finance technology to create a structure that would mitigate some of these risks.
- Analyzing the project and processing the bulk of the initial approvals during the COVID-19 pandemic, with no ability to get onsite and manage due diligence workstreams in the typical way.
- Managing a very diverse set of lenders through an exhaustive multistage syndication and credit approval process.
How is ADB’s approach to private capital mobilization evolving, and what new approaches are you considering?
ADB continues to be extremely innovative in mobilizing capital. Traditionally, ADB has relied on private sector commercial banks for private capital liquidity. We are increasingly working with private sector institutional investors including pension funds, asset managers and insurance companies, as a source of alternative and much-needed private capital mobilization.
Additionally, we have ramped up our engagement with private sector insurance companies working with the liability side of their books to mobilize private capital on an unfunded basis. Here we continue to transfer risk whilst holding the underlying asset on ADB's balance sheet on a transaction-by-transaction basis. Recently we signed the $1 billion Master Framework Program for Financial Institutions with five private sector insurers, giving us the ability to increase out lending to both commercial banks and non-bank financial institutions in the region through the use of credit insurance.
ADB intends to scale up the use of blended finance to increase the mobilization of private capital. We are partnering with new private sector organizations to increase mobilization, including under the new Climate Innovation and Development Fund, a recent initiative with Goldman Sachs and Bloomberg Philanthropies.